A potentially parlous exit from gold

November 01, 2011   Britt Erica Tunick

Will hedge funds’ exodus from the once-hot commodity create fresh banking turmoil?

Illustration: Joe McLaren
As hedge fund managers stockpiled gold over the past three years, its price skyrocketed. So when the precious metal suddenly fell about 8 percent in late September, it came as little surprise that hedge funds were behind the move. During the last week of the month, hedge funds and other nonbank speculators sold 22 percent of their gold holdings, amounting to about $6 billion, according to Bank of America’s weekly hedge fund report.

The need to raise cash by funds suddenly facing huge losses elsewhere apparently led to the selling, as did the surge in the dollar, which trades inversely to gold. The price dip made investors wonder if hedge funds have too much exposure to the yellow metal ¬— and if that could carry systemic risk should gold prices plummet.

John Paulson, the world’s leading goldbug and manager of the third-largest hedge fund firm in the U.S.,...

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